Not a pretty picture

We review Info-Communications Media Development Authority (IMDA) regulations governing the spectrum rights recently acquired by TPG Telecom, to ascertain if there is an avenue for more positive scenarios for Singapore’s incumbents.

Our conclusion is that the worst case scenario of a more aggressive tariff war cannot be ruled out, thus we maintain our NEGATIVE view on the sector. De-rating catalysts are expected from the start of operations by TPG or any insight into its tariff plans and strategy.

Continue to HOLD Singtel and SELL StarHub and M1.

Risks to our view include an early exit by TPG and/or robust growth in fixed broadband and enterprise.

Live-&-let-live scenario

We currently assume that TPG’s competition will erode incumbents’ wireless revenue, though not necessarily by double digits.

We estimate 2-4% declines for 2017-19E. This assumes that it and the mobile virtual number operators carve out a minority share of less than 10% of industry wireless revenue by 2019E.

Cut-loss scenario

We think this scenario would provide the quickest relief for the incumbents’ operations and stock performances. According to Section 15 of the regulations, TPG can surrender or terminate its license with IMDA's approval by giving six months of advance notice. Under Section 17, there will be no compensation or refund of fees already paid.

Based on IMDA’s schedule, the major licensing fees have already been paid. As any capex and start-up opex will naturally be forgone for TPG, we doubt that it would opt for such an exit without putting up a fight.

Go-all-the-way scenario

As IMDA regulations discourage any sale of its licence before it fulfills all its coverage commitments, TPG may opt for accelerated service rollout and aggressive market-share grab. This could tempt an incumbent to take it out of the market.

We have seen such a consolidation in the Philippines in 2012, when PLDT (TEL PM, PHP1,560, HOLD, Target Price PHP1,440) acquired unlisted Digitel. The prospect of a new entrant motivated the Philippine incumbent to take out a potential competitor in 2016, even before it started commercial operations. The revenue at risk for PLDT from aggressive competition likely provided justification for its acquisition.

With Singapore’s wireless service revenue at SGD4b in CY2017, a 10% pa erosion over five years would translate to SGD1.6b of present value in potential lost revenue for the incumbents. This amount is higher than TPG's spectrum costs and capex budget of SGD300m for Singapore. Theoretically, somewhere between its costs and the industry’s destruction value is a price an incumbent could pay for an acquisition or merger to stem revenue losses.

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